Reprinted with permission from Mortgage Banking magazine (February 2007, pages 48-56) published by the Mortgage Bankers Association (MBA).

Transcription

1 Reprinted with permission from Mortgage Banking magazine (February 2007, pages 48-56) published by the Mortgage Bankers Association (MBA). Cover Report: Servicing Trends REFI BUSINESS 101 Steve Michaels* took a deep breath. As the Powerful new vice president for products and pricing for Bestever Mortgage, he was feeling the pressure. He knew expectations were high, but he felt confident that he would be wellprepared for the refinance briefing he was to present to the executive committee at the end of the month. Bestever s share of the refinance market had been diminishing even before Michaels was hired. Servicing portfolio run-off was also increasing at an alarming rate. Based on internal analysis and industry reports, management expected that the overall refinance market would end the year down by nearly 30 percent compared with 2005, and by an additional 25 percent by the end of Management knew there wasn t much that could be done to improve the shrinking market; rather, the management team charged Michaels with developing products and programs that could improve Bestever s share of the market that was out there and keep current servicing customers from refinancing elsewhere. *Note: Bestever Mortgage and Steve Michaels are fictional, but the data, analytics and survey results presented are actual results from a recent study conducted by First American Real Estate Solutions (RES), Santa Ana, California. new tools are available to help lenders target and retain more refinancing borrowers. By using mortgage data and analytics, smart servicers can dramatically boost retention rates. BY TERESA GROVE 48

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3 Figure 1 Key Refinance Markets (April June 2006) Figure 2 Sample Market Share Report Refinances per County State 1,000 Population San Joaquin County California Anne Arundel County Maryland Frederick County Maryland Union County New Jersey Riverside County California Los Angeles County California San Bernardino County California Sacramento County California San Diego County California Middlesex County Massachusetts Searching for answers Michaels first order of business in his new job was to perform an in-depth analysis of refinancers in order to gain more insight into market trends. Armed with that knowledge, he knew he would have a better chance of finding ways to more effectively capitalize on Bestever s strengths and, consequently, both secure more refinance business and defend against competitive encroachment on Bestever s existing customers. To start the process, Michaels purchased two data files consisting of 25,194 recently refinanced mortgages (for Bestever borrowers as well as borrowers who got their loans with lenders other than Bestever) in 722 counties, with transaction dates between April 2006 and June This file of recent refinancers included the current and previous lenders names; each property s address, loan type and loan amount; and details about the recorded transaction. The file was further appended, according to Michaels specifications, to include additional metrics and analytics, such as median home value and loan-to-value (LTV), creating a very detailed profile of recent refinancers. The second file consisted of 173,917 borrowers on adjustable-rate mortgages (ARMs) facing a reset in the first # of First Total Loan Average Loan Rank Lender Loans Amount Amount 30 Competitor $29,063,683 $242, Competitor $23,630,400 $212, Competitor $23,284,413 $228, Bestever 101 $22,282,926 $220, Competitor 4 94 $21,311,654 $226, Competitor 5 98 $20,851,200 $210, Competitor $20,763,433 $190, Competitor $20,745,160 $207, Competitor 8 60 $20,254,068 $337, Competitor 9 98 $20,003,780 $204, Competitor $19,686,675 $255, Competitor $19,546,879 $222, Competitor $18,725,245 $208, Competitor $18,452,549 $240,812 Geography: Arizona Time Period: 4/1/06 4/30/06 Loan Options: Refinance, Adjustable/Fixed, Conforming/Nonconforming, Conventional, FHA, VA, Loan Types, Residential three months of This ARM reset file included the same detailed data as the recent-refinancer file, and covered almost 700 counties that Michaels selected from within his footprint. In addition, Michaels surveyed a sample of the recent refinancers (n=129) to validate his assumptions, such as the primary reasons consumers refinance, how they learn about their refinance choices and how they select a lender with which to refinance. He also polled the sample to determine what they thought lenders must do to capture more business. Insights gained After a careful analysis of the data, Michaels noticed that refinance activity, both in terms of absolute volume and rate relative Figure 3 Reasons for Refinancing an Existing Home What was your primary reason for refinancing? To get a lower monthly payment To get cash for debts 36% Taxes Large purchase 7% 15% Education expenses 17% To avoid reset or balloon payment 19% 8% To get a shorter term For an unexpected event Home improvement/repairs 41% Bill consolidation 0% 20% 30% 40% 50% 60% 66% 70% 51

4 Figure 4 Purchase Cycle: Elapsed Time Between Awareness and Action How long had you been thinking about refinancing before taking the first concrete steps to identify a lender? Figure 7 Four or more Requests for Approval How many mortgage applications did you submit? 3% 35% 32 30% 25% 24 Two or three 20% 15% One 69% 5% 1 0% Less than One year a month months months months months or more Figure 5 Advance Knowledge of Credit Score, Equity, Mortgage Rates and Products Prior to investigating your loan options, where you aware of... The equity in your home Your credit score 78% 83% Figure 8 0% 20% 30% 40% 50% 60% 70% How Many ARMs are Approaching Reset in 2007? (Upcoming opportunities for 2007; first resets occurring in 2007, by month) First Change 2007 Jan Feb Mar Apr May Jun Hybrid 13,534 11,781 14,457 22,308 24,953 25,174 2, , Subprime 46,403 40,284 43,612 59,330 59,934 67,972 Grand Total 63,065 52,443 58,409 86,837 85,378 93, ,917 Mortgage rates and products 50% 55% 60% 65% 70% 75% 80% 85% 90% Percentage Aware Figure 6 Two or three 57% Extent of Comparison Shopping How many mortgage options did you research? My broker/banker did this 6% Four or five 16% One Six or more 11% 87% to population, was concentrated predominantly in high-priced markets, where the median home value was 50 percent or more above the national median (see Figure 1). Michaels already knew from experience that home value and location are significant factors in real estate and mortgage financing; the mortgage data and analytics allowed him to compare Bestever s performance with the competition s, and quickly identify the specific markets in which Bestever was losing market share (see Figure 2). With the in-depth review of the recent-refinancer file completed, Michaels turned his attention to the results of the survey. He was not surprised when responses to the question, What was your primary reason for refinancing? revealed that the largest group (47 percent) refinanced to reduce payments either by avoiding an ARM reset or balloon payment, or by getting a lower monthly payment due to a lower rate on their new loan (see Figure 3). Another 36 percent of surveyed refinancers did so to get cash out to cover debts. This confirmed what Michaels already knew: Refinances are economically driven. More difficult to predict, however, is exactly which borrowers will refinance and when (see Figure 4). Nonetheless, it was clear from the survey that refinance prospects tend to be well-informed, with the majority (84 percent) having investigated two or more mortgage options and more than one-third having submitted two or more applications (see Figures 5, 6 and 7). 53

5 From the ARM-reset file, Michaels could see that nearly 174,000 borrowers in the counties he selected would face a reset in the coming months (see Figure 8). Michaels knew Bestever had a very competitive product that could provide an attractive solution for ARM borrowers looking to avoid a payment shock. After scrubbing the list against his own portfolio and filtering it by his loan-to-value criteria, he was able to identify a net list of 121,000 mortgage refinancing prospects. Strategy development: Increasing share Equipped with a solid understanding of Bestever s performance against the competition and a valid list of refinance prospects, Michaels was ready to explore what Bestever could do to enhance its ability to attract and close more loan prospects. The recent-refinancer survey revealed that once refinancers Figure 9 Sources of Information About Mortgage Choices Overall How did you learn about your mortgage financing choices (select all that apply)? Newspaper Radio/TV Real estate agent or broker Mail Visited a branch office Financial adviser 5% 6% 8% 8% Friend/family member 19% Called a bank or mortgage company Mortgage broker Internet 35% 0% 20% 30% 40% When asked why they did not contact their current lender, the majority of respondents indicated they did not think they could modify their loan or refinance with their current lender. decided to shop around for a new mortgage, the Internet was the most common source of information (35 percent). That source was followed by mortgage brokers (28 percent) and banks/mortgage companies (28 percent) (see Figure 9). The predominance of the Internet as a key source of mortgage information for refinancers indicated to Michaels that Bestever should place a much greater focus on its Web marketing efforts. He was already aware that traditional lender sites like his are soundly beaten by mortgage lead-aggregation Web sites when it comes to attracting mortgage prospects. This is not because they allow consumers to comparison-shop or apply for a mortgage online, but because of tools such as home valuation and mortgage-payment calculators that are available on these sites. Although the Internet was considered a key source of information about mortgage choices, when recent refinancers were asked what three sources of mortgage information they felt were the most trustworthy, the Internet did not rank very high. Instead, friend/family member was the No. 1 choice, followed by branch offices and financial advisers (see Figure 10). This apparent pattern of using the Internet to research mortgage choices yet preferring to work with personal contacts played to two of Bestever s strengths: a well-established network of loan officers and a large portfolio. Michaels knew that today s Web technology and searchengine marketing techniques would allow him to quickly Figure 10 Level of Trust in Information Sources Please select the three sources of mortgage information you feel are the most trustworthy Radio/TV 6% Mail Newspaper 11% 13% Real estate agent or broker 25% Internet 33% Mortgage broker 40% Financial adviser 50% Branch offices Friend/family member 59% 60% 0% 20% 30% 40% 50% 60% 70% improve Bestever s Web site to generate more prospects. Accordingly, his recommendations would include updating Bestever s Web site to be more search-engine-friendly while including enhanced services such as home valuation, mortgagepayment calculators and product comparisons. Bestever would then be in a position to leverage the strength of its large network of loan officers by recommending local loan officers whom Web prospects could contact for a personal consultation. Michaels also saw an excellent opportunity to capitalize on the power of his servicing portfolio to generate referral business from Bestever s existing customers. In fact, the pilot program could be as simple as providing current customers with an educational statement-stuffer or to pass along to friends and family members who might be in the market for a mortgage. Strategy development: Decreasing run-off In thinking about Bestever s large servicing portfolio, one thing was of the utmost importance: stemming runoff. More than one-third of respondents to the survey of recent refinancers 54

6 Figure 11 Contact With Current Lender Prior to Switching Did you speak with your current lender before switching (switchers only)? Check Payoff Amount No 53% Yes 47% Willing to Work with them again Check the programs for existing clients Check their rates/terms 0% 20% 30% 40% 50% 60% Figure 12 Switching Behavior Did You Change Lenders? Figure 14 Borrower Perception of Improvements Lenders Should Make What should lenders do to enhance their products and services? (Top 5) Guarantee rates and fees 77% Communicate benefits and risks of loan products 75% Stayed 47% Switched 53% Provide incentives for existing customers 6 Keep the customer apprised of status 63% Provide more education 53% 40% 50% 60% 70% 80% Figure 13 Stay with current lender 37% Future Preference for Choosing a Lender Based on your experience, what would be your preference in choosing a lender in the future? Use a lender recommended by a real estate agent Use Internet to investigate 25% Use a familyrecommended lender 1 Use mortgage broker to investigate 19% indicated they would prefer to stay with their current lender in the future, yet fewer than half had contacted their current lender before refinancing with another lender (see Figure 11). When asked why they did not contact their current lender, the majority of respondents indicated they did not think they could modify their loan or refinance with their current lender. Overall, 47 percent of respondents indicated they stayed with their lender (see Figure 12), and based on their experience 37 percent would prefer to stay with their current lender (see Figure 13). Michaels knew that Bestever s existing customers were already barraged with refinance offers from the company s competitors. Experience told him that proactively approaching his current customers about a new loan in order to retain them could have the opposite effect: unintentionally driving them to start shopping around, and thus accelerating run-off. Bestever did have reactive programs in place for its customers who specifically asked about a refinancing or loan modifications. However, according to the survey, most borrowers did not contact their current lender before refinancing. 55

7 Michaels decided that the best way to address this delicate issue would be to provide the at-risk groups with occasional timely contacts, reminding them of the benefits Bestever offers to current customers such as automatic payment, online account review, 24/7 customer service, and access to additional financial services and insurance. He felt this softer approach would keep Bestever top of mind, yet be far less likely to trigger mortgage loan shopping among his existing customers. He also believed that the communication of Bestever s benefits could help build loyalty and increase the chances that the borrower would contact Bestever before switching to another lender. But just to make sure, Michaels would propose testing the program on a sample and measuring the results against a control group before widely deploying this proactive approach. Building competitive advantage Now that Michaels knew how to identify the prospects most likely to refinance, he needed to establish Bestever s unique selling points as compared with the mortgage lenders competing for the same business. Respondents from the recentrefinancers survey indicated that the most important thing lenders can do to enhance their products is to guarantee rates and fees (77 percent), followed closely by clearly communicate the benefits and risks of the loan products (75 percent) and provide incentives for existing customers (64 percent) (see Figure 14). In fact, Bestever had already been considering a guaranteed, single-fee program for refinancers due to feedback from loan officers. With some effort, Bestever could enhance its communication of benefits and risks by supplementing the confusing plethora of disclosures with consumer-friendly summaries. Moreover, the marketing messages for the program could be designed to emphasize the service factors most valued by refinancers (see Figures 15 and 16). Michaels would also propose developing more streamlined refinance and loan-modification programs, which could provide unique benefits for existing customers with excellent payment histories. These new loan programs, when communicated appropriately, could help stem run-off and increase the chances of future referrals. The executive briefing Michaels summarized his recommendations to his executive committee as follows: Offer qualifying prospects facing an ARM reset in the next three months a guaranteed, single-fee refinance program. Include a consumer-friendly product summary to supplement the standard legal and regulatory disclosures. Generate more leads by making Bestever s Web site more search-engine-friendly and by adding home-valuation tools and mortgage-payment calculators. Recommend a local loan officer to Web prospects for personal consultation. Generate referral business by providing current servicing customers with an educational statement-stuffer or e- mail to pass along to friends and family who might be in the market for a mortgage. Provide timely, occasional contacts to borrowers who Figure 15 Importance of Service Factors Please select the top three service factors that influenced your decision Full explanation of terms Easy process Fast process Figure 16 0% 20% 30% 40% 50% are at risk of runoff, to remind them of the benefits Bestever offers and to keep the brand top of mind. Develop more streamlined refinance and loan-modification programs for current borrowers with excellent payment histories. Communicate these programs appropriately to stem run-off and increase the chances of future referrals. Taking all the data, analytics and survey results into account, Michaels was confident that his proposed recommendations would increase Bestever s share of refinancings, despite the slowing market, and stem the run-off of the company s servicing portfolio. Assuming his proposal would be accepted by the executive committee, Michaels knew the next task at hand would be determining how to increase Bestever s share in the purchase mortgage market. To be continued.... MIB Teresa Grove, CMB, is vice president of marketing for First American Real Estate Solutions, Santa Ana, California, a member of The First American Corporation family of companies. She can be reached at tgrove@firstam.com. 3 42% 41% Borrower Perception of Self- Improvements They Can Make What would you do differently if you do this again? (Top 5) Be better-prepared financially Do more research on my own Ask more questions Give myself more time Insist on more communication 21% 29% 33% 45% 42% 0% 20% 30% 40% 50% 56